Management of Companies Responsibilities of Directors and Shareholders

This study material elaborates on corporate governance, the responsibilities of directors and shareholders, their rights, and the structuring of company operations under the guidance of legislation and principles.

Corporate Governance

Corporate governance refers to the framework of rules and relationships by which authority is exercised and controlled within a corporation. It encompasses the mechanisms by which companies are held accountable by those in control, providing transparency and accountability in operations. This structure is deeply influenced by various theories of governance.

Corporate Governance Theories

Agency Theory: This theory posits that the board of directors has a duty to the shareholders to maximize their wealth. It recognizes the potential misalignment of interests between members (shareholders) and managers, suggesting that incentives, such as profit-based bonuses, are necessary to align these interests. Key components include directors demonstrating transparency in their actions to ensure member interests are prioritized.
Stakeholder Theory: This perspective expands the responsibility of corporations beyond shareholders to include various stakeholders such as employees, customers, communities, and the environment. It argues that organizations have ethical obligations to consider the impacts of their decisions on all stakeholders.

Key Components of Governance

According to the Governance Institute of Australia, essential components of good governance include:

Transparency: Ensuring clarity in decision-making to foster trust.
Accountability: Mechanisms must be in place to hold entities accountable for their actions.
Stewardship: The obligation of directors to manage the resources of the company responsibly.
Integrity: Ethical conduct and compliance with laws and regulations.

Implementing Effective Corporate Governance

The ASX Corporate Governance Principles, applicable to public companies, were revised in 2020 and emphasize:

Establishing foundational management and oversight processes.
Structuring boards for effectiveness and value addition.
Fostering a lawful, ethical, and responsible culture.
Ensuring corporate report integrity.
Making timely disclosures and managing risks effectively.
Fair and responsible remuneration practices.

Separation of Powers

The principle of separation of powers highlights that members (shareholders) and managers have distinct decision-making responsibilities. Members control appointments and removals for directors, while directors oversee the company’s business affairs. This principle maintains a balance that is legally established by the company’s constitution.

Case Studies Illustrating Separation of Powers

Automatic Self-Cleansing Filter Syndicate Co v Cunningham (1906): The case highlighted how members' directions regarding management decisions could not be enforced as management powers were vested in the board.
John Shaw and Sons (Salford) Ltd v Shaw (1935): It confirmed that the board's decision to commence legal action was within its management powers, and members could not override this.
Australasian Centre for Corporate Responsibility v Commonwealth Bank of Australia (2016): Affirmed that shareholders cannot control the directors’ exercise of powers.

Officers and Directors

An officer is defined as anyone who participates in decisions impacting the business, including directors, the company secretary, and senior managers. Understanding the requirements to be a director is crucial. Directors generally must be at least 18 years old, must provide written consent, and possess a director identification number.

Requirements for Directors

Must comply with stipulations regarding the number of directors based on the type of company:

Proprietary companies require at least one director.
Crowd-sourced funded proprietary companies need two directors.
Public companies require a minimum of three directors.

Directors must ordinarily reside in Australia and can face disqualification for offenses, including bankruptcy or criminal convictions relating to corporate conduct.

Types of Directors

Formally Appointed Director: Officially appointed according to regulation.
Alternate Director: Appointed to stand in for another director.
De Facto Director: Acts as a director without valid appointment.
Shadow Director: Influences directors without formal appointment.

Company Secretary

The company secretary manages routine administrative matters and is a key officer within the corporation. While a public company must have a company secretary, it is common for a proprietary company to have one of the directors serve in this capacity.

Directorial Powers

Directors have expansive powers to manage the company’s affairs as long as it does not conflict with the provisions established by the Corporations Act. Members retain certain powers, such as appointing or removing directors and influencing management without directly interfering in day-to-day operations.

Appointment, Remuneration, and Removal of Directors

Appointment of directors is typically dictated by the company’s constitution or replaceable rules and must be communicated to the Australian Securities and Investments Commission (ASIC) within 28 days. Directors’ remuneration and other terms of service are usually determined at the board level, guided by company constitutions.

Removal of Directors

In proprietary companies, directors can be removed by other directors or by a resolution of members if outlined in the constitution.
In public companies, removal requires an ordinary resolution from members at a general meeting, ensuring transparency and fairness in the management structure.

Members of the Company

Members (shareholders) have specific rights and responsibilities that shape their engagement with the company. These rights are designed to facilitate decision-making processes during meetings, influencing the company's direction while maintaining a balance against the management's powers.

Members’ Meetings

Members exercise their rights at meetings, including appointing directors and making significant financial decisions. Types of meetings include:

Annual General Meetings (AGMs): Mandatory for public companies, allowing members to review company performance and elect directors.
Extraordinary General Meetings (EGMs): Convened for urgent matters outside the regular meeting schedule.
Class Meetings: Held for specific classes of shareholders to exercise unique rights.

Voting Mechanisms

Ordinary resolutions require the majority vote of those present.
Special resolutions necessitate a 75% majority.
Voting may occur via show of hands or polls based on specific company by-laws.

Dividends

Dividends represent a return of profits to shareholders but can only be paid if the company passes solvency tests per the Corporations Act. Directors hold discretion over dividend distributions, aimed at balancing shareholder returns and company viability.

Dividend Imputation

This taxation principle allows shareholders to receive credits for taxes already paid by the company, mitigating double taxation impacts and optimizing the tax benefits for shareholders.

Management of Companies: Directors' and Shareholders' Responsibilities

Management of Companies: Directors' and Shareholders' Responsibilities